Securities law deals with the regulations that apply to financial instruments like stocks, bonds, and mutual funds. In addition to preventing violations like insider trading, fraud, and market manipulation, these laws also promote greater transparency through a system of reporting and enforcement.
Within the financial planning field, there are plenty of rules and regulations of which financial advisors need to be aware in order to avoid legal issues. While most financial planning lawsuits arise from losses caused by flawed financial advising, there are a number of instances in which a financial professional may be vulnerable to a lawsuit. While every financial advisor knows the duty of care they owe to their clients to work towards their best interests, it is also important for them to be familiar with other kinds rules violations that could result in litigation.
Common Causes for Lawsuits Against Financial Advisors
Within the financial planning field, legal disputes can occur if a financial advisor engages in any of the following:
- Disclosing company secrets to a competitor
- Using company funds or information for personal profit
- Mixing the company’s money with their personal accounts
- Committing a breach of fiduciary duty
While a financial advisor cannot know everything about market conditions, he or she is expected to have a decent amount of industry knowledge when creating financial plans for an individual or organization. Essentially, financial professionals need to adhere as closely as possible to the professional and ethical standards for financial advising to avoid legal complications.
Additional Legal Problem Areas for Financial Advisors
Broker Raiding
Brokers often move from one firm to another for any number of reasons. Nevertheless, disputes can result over whether their clients should stay with the broker or the firm. While there are rules covering these types of incidents, people often don’t follow them strictly.
Broker raiding happens when a firm tries to lure a group, maybe even all, of another firm’s financial advisors from one of their offices. In this case, the raided firm may be left without any advisors at a branch location. When this occurs, a lawsuit is almost a certainty. If enough brokers leave a firm, it could be forced to shut down or at least to close that particular office.
This also applies to a situation where a broker leaves a firm and convinces fellow advisors to come along with him to the new firm. In this case, the firm losing brokers would bring legal action against those who are leaving.
Promissory Notes
Promissory notes are sometimes employed by large brokerage firms to lure financial advisors to their firm. Basically, a promissory note is a loan to the new advisor which is usually forgiven over a fixed period, providing the advisor stays with the issuing firm. If the financial advisor remains with the new firm for the period of the loan (typically 5 to 7 years), the advisor is no longer responsible for repaying the loan. If, however, he or she leaves or is terminated before the loan’s expiration date, the brokerage firm usually sends out a demand letter asking the advisor to repay the balance of the loan.
If the financial advisor refuses to pay up and cannot come to a mutual agreement with the firm, the firm will usually sue the broker for failure to repay the promissory note.
Financial planners need to know that there other issues besides misrepresentation, breach of contract, and breach of fiduciary duty that can land them in legal hot water. Things like broker raiding and failure to repay promissory notes can trigger litigation between financial advisors and their firms. The bottom line is that financial services professionals need to educate themselves about the ins and outs of securities law to make the kinds of decisions which will help them avoid legal jeopardy throughout their careers.
Resources
https://www.hg.org/legal-articles/common-litigation-challenges-for-financial-advisors-45240
https://www.findlaw.com/consumer/securities-law/what-does-a-securities-lawyer-do.html